Chapter_05_Intercompany_Transactions_Bonds_and_Leases
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Chapter_05_Intercompany_Transactions_Bonds_and_Leases

Advanced Accounting 12e Paul M Fischer William J Taylor Rita H Cheng

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Chapter_05_Intercompany_Transactions_Bonds_and_Leases

 

Complete Chapter Questions With Answers

 

Sample Questions Are Posted Below

 

1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:​

  a. ​subsidiary’s ability to borrow larger amounts of capital at more favorable terms than would be available to the parent.
  b. ​parent’s ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary.
  c. ​parent’s desire to decentralize asset management and credit control.
  d. ​parent’s desire to eliminate long-term debt.

 

ANSWER:   b
RATIONALE:   The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the parent’s ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary. The parent may also desire to manage the capital needs of the subsidiary for better control of capital sources.
DIFFICULTY:   E
LEARNING OBJECTIVES:   Introduction

 

2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:

  a. ​replace the existing debt with new debt at a lower interest rate.
  b. ​reduce the parent company’s acquisition price for the subsidiary.
  c. ​increase the parent company’s ownership percentage in the subsidiary.
  d. ​create interest revenue to offset interest expense in future income statements.

 

ANSWER:   a
RATIONALE:   Although not explicitly stated in the chapter, to replace existing debt with new debt at lower interest rates would be one reason a parent might purchase the outstanding bonds of a subsidiary.
DIFFICULTY:   M
LEARNING OBJECTIVES:   ADAC.FISC.5-1

 

3. Intercompany debt that must be eliminated from consolidated financial statements may result from:

  a. ​one member of a consolidated group selling its bonds directly to another member of the group.
  b. ​one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.
  c. ​one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group.
  d. ​all of the above.

 

ANSWER:   d
RATIONALE:   All of these situations will result in intercompany debt that must be eliminated from consolidated financial statements.
DIFFICULTY:   E
LEARNING OBJECTIVES:   ADAC.FISC.5-1

 

4. Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

  a. ​not needed except in the period of acquisition if purchased at par.
  b. ​not needed except in the period of acquisition if purchased at a premium or discount.
  c. ​not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
  d. ​needed each period as long as the intercompany investment in bonds exists.

 

ANSWER:   d
RATIONALE:   As long as intercompany debt exists, this debt must be eliminated from consolidated financial statements.
DIFFICULTY:   E
LEARNING OBJECTIVES:   ADAC.FISC.5-1

 

5. In years subsequent to the year one member of a consolidated group purchases another member’s outstanding bonds from outside parties, Consolidated Income Statements:​

  a. ​recognize a prorated share of any gain or loss from intercompany bonds.
  b. ​recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.
  c. ​recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.
  d. ​would not recognize any gain or loss from intercompany bonds.

 

ANSWER:   d
RATIONALE:   In years subsequent to the year one member of a consolidated group purchases bonds of another member from outside parties, the bonds are effectively retired on a consolidated basis and a gain or loss is recognized in that year. Although the bonds will continue to exist and each entity will have balances pertaining to those bonds in subsequent years, those balances will be eliminated, so there will be no impact on the consolidated financial statements in subsequent years.
DIFFICULTY:   E
LEARNING OBJECTIVES:   ADAC.FISC.5-1

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